5 things you need to know before selling your annuity income

Please note: The information in this article was correct at the time of writing. Since then, the government has scrapped plans for a secondary annuity market. Please visit our blog to find out more.

The government has confirmed that, from April 2017, “more than 5 million people will be able to cash in their annuities if they wish.” The new law will also extend to people who buy annuities in their future.

This does not cancel or change the annuities for people who want to keep them, it simply adds the flexibility for those who would prefer a lump sum instead of a set income.

If you are one of the people receiving a tiny sum from your annuity then you may be keen to trade it for a lump sum when the opportunity arises next year – but doing so may not work in your favour.

Here’s what you need to know before searching for a buyer:

one pension It isn’t a refund

This won’t be like returning an item to the supermarket; the provider will not return your money, minus payments you have already received. Instead, a third party would give you a lump sum and they will then receive your annuity payments until you die.

two pensionsYou may not receive very much

The amount of money you sell for is largely dependent on what the buyer is willing to pay – and they will be looking to profit. They may also think that most people would only want to sell their income for life if they do not think they will live for a long time, so buyers may offer smaller sums than sellers were expecting. To help people have realistic expectations, the government and FCA plan to have an online calculator for annuity holders to see an estimation of its value.

three pensionsYou will be taxed

The lump sum you receive will be treated as earnings in that year, which means you could pay income tax on it if it exceeds the personal allowance. Depending on your other earnings and the size of your lump sum, it is possible that you will be pushed into a higher tax bracket, paying 40% or even 45%. This is one of the biggest considerations if you want to sell your annuity income.

four pensionsYou will be giving up security – for yourself and a beneficiary

The purpose of an annuity is to offer security as you always know how much money you will receive, and it is also possible to provide an income to a beneficiary after you die. But selling it will mean the payments go to someone else instead of you. This may be appealing at first, when you consider the lump sum, but after a few years you may be worrying about how to pay the bills.

five pensionsIt isn’t a solution to clear debts

Giving up a guaranteed income for life means that you will need to have other money to live on. This could be easier when you only get hundreds of pounds a year, but people with larger annuities will have to seek regulated financial advice before being able to sell. If you do have multiple sources of income then it could make sense to sell an annuity to clear a debt, but it would not be appropriate for everyone, and debt restructuring advice should be your first step.

For some people, it may be appropriate to trade their annuity income for a lump sum. For most people, though, it could be disastrous. With the cash spent or running low and insufficient means for the next few decades, many retirees could be left destitute. 

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